Why Apple, Inc. Investors Need To Pay Attention To Project Titan

  • Investors continue to be skeptical about Apple's future growth prospects.
  • Apple has several projects in the pipeline, while some of its traditional hardware units are now showing signs of renewed growth.
  • None, however, has the potential to move the needle for Apple the way the Apple Car does.

Tim Cook recently celebrated his fifth anniversary as Apple, Inc. (NSDQ:AAPL) CEO, and Wall Street analyzed how he has performed since he replaced Steve Jobs at the helm. The positives: Cook has helped Apple to realize an impressive near-fourfold revenue growth while net profit more than doubled to $53B last year. Meanwhile, market cap has ballooned to $570B, a 60% increase.

Also see: 3 Reasons To Buy Apple, Inc. Stock Ahead Of iPhone 7 Launch

However, despite this immense growth, there's this nagging feeling among investors that Apple's best days are now behind it. Apple has recorded a worrying double-digit revenue decline for two straight quarters. Until the last quarter the iPad had been in a prolonged slump, while new initiatives such as Apple Watch and Apple Pay have not panned out as hoped for.

What does this difficult backdrop portend for the future of Apple stock? Is it the revived iPad/Mac, Apple TV, or Apple Car that will do the trick for Apple stock?

Apple, Inc. Has A Few tricks up its sleeve

A sharp drop in iPhone sales is certainly disconcerting for investors because for all of Apple's efforts at diversification, the iPhone still contributes close to 60% to the top line. iPhone unit sales tanked 16% during the last quarter, the worst since the launch of the flagship device.

After posting close to 10 quarters of declining sales, the iPad finally showed some signs of life thanks to the launch of the 9.7-inch iPad Pro leading to a 7% revenue growth. Apple's Mac line though has continued to suffer, with unit sales declining 10.4% during the last quarter. The much-awaited overhaul of MacBook Pro, however, will help breathe new life into the segment and might be enough to reverse three-quarters of sales declines. The revamped Mac Book Pros might hit the market sometime in October or November.

But it's not very likely that Macs and iPads will be capable of driving long-term growth for Apple. The two segments combined contribute just 18% of Apple's sales and equal about a third of iPhone revenue. Moreover, these two are mature product lines just like the iPhone, and growth in the low single-digits is more likely to be the long-term trend.

Apple Car can Move the Needle for Apple

Apple has other crucial plays such as the company's Services segment and the Apple TV. The services segment is the only Apple segment that has been consistently growing  in double digits over the past four quarters and is likely to overtake iPads/Macs revenue in maybe 6-7 quarters. Growth in Apple's installed base is showing no signs of slowing down, and this is guaranteed to drive long-term growth for the high-margin business.

Also see: Is iCar The Innovation Apple, Inc. Desperately Needs?

Apple TV has decent potential, but the development trajectory remains muddled at best. Apple has been keen on launching a streaming TV service, but its efforts have been hampered by the company using hardball tactics during negotiations with cable content providers as I explained in this article here.

So far the Apple Car appears to have the biggest potential to truly move the needle  for Apple. Although many AAPL stock investors tend to dismiss it as just another of Apple's many secret projects, the Apple Car is perhaps Apple's best kept secret. Apple's silence on the matter is the major reason why investors remain skeptical about the iCar. But recent Twitter reports by Apple analyst Neil Cybert say that Apple signed a Non-Disclosure Agreement with a major South Korean battery manufacturer of cylindrical lithium-ion batteries. This could be an indication that Apple could be working on an electric car.

Other indications that point towards a possible Apple Car development include the fact that Apple has upped its R&D spend this year to $10B, more than triple what the company spent last year. Further, Apple has in the past poached several key Tesla Motors (NSDQ:TSLA) executives and engineers presumably to work on Project Titan.

Initial reports by the Wall Street Journal suggested that the iCar had a target ship by date of 2019. But current indications suggest that the launch is likely to come around 2021, or about five years from now. Many analysts see BMW as the best comparison for what an Apple Car is likely to become in a wildly successful scenario. The BMW brand sold 1.9 million vehicles around the globe in 2015. At an ASP of $75K, that could net Apple a cool $142.5B, or more than what AAPL will make from iPhone sales this year.

But an even bigger opportunity for Apple could emerge in the rapidly growing shared mobility market, one which Morgan Stanley pegs at $2.6 trillion by 2030. Apple can decide to rent out its vehicles on an ongoing basis instead of selling them outright, a feature known as car-as-a-service. A 10% share of the market could provide $260B in incremental revenues for Apple, while a 16% share (same as the company's global smartphone market share) would mean revenue of $400B for the company.

Apple as a dividend play

Despite its short-term weaknesses, Apple stock remains a prime dividend play for long-term investors. Apple stock currently yields 2.14% and the company has been growing its dividend in the double-digits over the past few years. A good way to estimate long-term returns for dividend stocks with growing dividends is:

Total Return for Growing Perpetuity= Yield + Growth

Wall Street estimates that Apple will be able to grow its dividend at 8.1% CAGR over the next 10 years. Thus Apple's projected 10-year annual return works out to 10.2%. Wall Street had earlier projected Apple's 10-year dividend growth to clock in at 8.9% but lowered it due to the ongoing iPhone/iPad/Mac weaknesses. If pipeline projects such as Apple Car live up to their expectations, Apple might be able to achieve dividend growth of around 12% leading to a healthy 14+% annual return over the long-term. This makes Apple stock an ideal dividend play for long-term investors.

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